Economists’ view | RBA may need to do more

Australia's economy grew a moderate 0.5 per cent last quarter as a burst of business investment helped offset government cutbacks, though declining export earnings and a cresting mining boom point to tougher times ahead.

Gross domestic product (GDP) rose 3.1 per cent compared to the third quarter of 2011, while growth in the second quarter was unchanged at 0.6 per cent.

The report justified this week's decision by the Reserve Bank of Australia (RBA) decision to cut interest rates to a record-matching low of 3 per cent.

MATTHEW JOHNSON, INTEREST RATE STRATEGIST, UBS

"Chain price index being down and growth being below trend, both tell me that inflation is likely to be lower in the future ... A small bit of the puzzle is in place for a rate cut in February but not the whole thing just yet.

"A recession? You can never say never. I guess the increase in inventories is not desirable but I can't see a recession forming in the data. It is the case that nominal GDP is growing very slowly. If that continues we'll have a year where times are pretty tough but it's not yet clear that it's going turn any worst than tough times."

SHANE OLIVER, CHIEF ECONOMIST, AMP CAPITAL INVESTORS

"Household consumption is particularly soft. Housing actually has a small rise – that's consistent with that sector bottoming out, but it's still a very modest growth. Business investment remains solid, particularly in machinery equipment and that particularly reflects the mining boom continuing. That's consistent with the capex figures we saw yesterday.

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"It really supports the RBA's case to cut interest rates, and it will support more rate cuts going forward.

"The risks are that the loss of momentum in mining investment and therefore the business investment generally gathers pace, and the other sectors of the economy don't grow to fill the gap at all.

"Yes there is a risk of recession, but I would say it's fairly low. To get a recession you really have to see deterioration globally. I don't think Australia is going into a recession on its own."

MICHAEL BLYTHE, CHIEF ECONOMIST, COMMONWEALTH BANK OF AUSTRALIA

"The economy is still rolling along the new trend base, but some momentum has come out of the economy since mid-year.

"We are seeing few signs of turnaround coming through. The mining part of the story remains strong. We are seeing a bit of a lift in residential construction starting to come through...

"A lot of interest rate stimulus has been put in place right now ... They will be fairly cautious about rate cut from here, but clearly low inflation is still in place. They’ve got to do more if it looks like it's necessary."

SU-LIN ONG, SENIOR ECONOMIST, RBC CAPITAL MARKETS

"I think when you look at the details of the expenditure measures, it's a fairly soft tone and consistent, we think, with a moderation in growth in the second half of the year and a move to a sub-trend pace of activity.

"To a degree it justifies the RBA's recent cut and definitely supports an easing bias. We think it argues for further cuts. But history tells us that an Australian recession usually only happens with a global recession. And while the globe is not exactly looking flash, I think we are a fair way from global recession.

"We are in for a period, we think, of sub-trend growth, probably for much of 2013. It's hard to see how there's going to be a lot of borrowing and household consumption. The odds are at the end of the day that we are in for a period of weaker growth, heading into the 2 per cent-type area. The RBA is probably going to have to revise down its growth numbers."

STEPHEN WALTERS, CHIEF ECONOMIST, JPMORGAN

"It was okay – it could have been a lot softer – but the mix of growth's not that great, with the public sector likely to remain quite a drag, the capital spending pipeline being worked off and a lot of mining companies sitting there with a lot of unused inventory.

"There's still a substantial amount of mining investment still to be done and the RBA's been cutting rates for more than a year now, so they will eventually get traction from that, so I think (the probability of a recession in Australia is) pretty low.

"We've got another one (rate cut forecast) in February. The risk is they'll have to go more than once more but at this stage we've just got that one."

BRIAN REDICAN, SENIOR ECONOMIST, MACQUARIE BANK

"The main point to note is that a 2.0 per cent annualised pace of growth is pretty lethargic for the Australian economy, and it's occurring before we're seeing the impact of falling mining investment, so that's a key risk as we move into 2013.

"There's clearly the risk (for a further slowing in growth). There are some hopes that housing construction may start to turn around, but the urgency to find a replacement for mining is quite marked.

"The cupboard is looking quite bare, with the government getting entrenched on cutting spending, consumers still cautious and companies outside the mining sector unwilling to spend more money. Apart from housing construction, it's difficult to see where growth is going to come from.

"We still think the RBA needs to be much more aggressive in getting rates down, we think the cash rate will fall to 2.0 per cent by Q3 next year."

SPIROS PAPADOPOULOS, CHIEF ECONOMIST MARKETS, NATIONAL AUSTRALIA BANK

"0.5 per cent illustrates just how soft the economy was in the third quarter, 2 per cent in annualised terms. So (it's) a below trend outcome that helps justify the Reserve Bank's actions in October and yesterday.

"Very small chance of a recession at this stage. Obviously the economy is still growing, it's just not growing as strongly as we would expect or we would like. But in terms of what it means for growth next year, with household consumption only growing 0.3 per cent in the quarter and non-mining investment still quite soft, we're optimistic that the rate cuts the Reserve Bank has put in place will help boost growth next year and we'll see much stronger growth throughout 2013.

"We do have another rate cut in early 2013, but we do expect that GDP will still be coming in at around 2.5 per cent to 3 per cent. In quarterly terms that's 0.7, 0.8 per cent for each quarter rather than 0.5."

ANNETTE BEACHER, HEAD OF ASIA-PAC RESEARCH, TD SECURITIES

"Compared with our forecast, it's a little softer than expected, however growth is still tracking above 3 per cent so from that perspective I still think Australia is doing rather well.

"We do see a lot of broad-based growth in terms of construction and investment so the economy is still tracking 2012 on pretty solid footing. We're also seeing a clear drag from the public sector, as expected, which is why monetary policy is accommodating.

"Overall I think the economy is still tracking at a better pace of about 3 per cent which is maybe below trend for Australia, but certainly outperforming its OECD peers by a wide margin."